sei report on funds

2011 SEI Private Equity Survey

TURNING CLIENT KNOWLEDGE INTO A

COMPETITIVE ADVANTAGE

PART THREE OF THREE

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The SurveyA total of 411 institutional investors, consultants, and fund

managers took part in SEI’s 2011 Private Equity Survey.

Just under half of the survey participants are based in the

United States. Another 30% are domiciled in Europe while

Asia, Latin America, Australia, and Africa represent the

remaining 21% of the survey universe.

Investors and consultants participating in the survey

report a wide range of experience with private equity.

More than half have been in the asset class for ten or

more years. The remaining 47% are evenly split between

those with seven to ten years experience and those with

six or fewer years as private equity investors.

Survey results are being presented in a three-part

series of papers:

I: THE LOGIC OF FUND FLOWS analyzes where, why

and how institutions invest, asset allocation trends among

investors, and how private equity fund managers are

evaluated and selected.

II: SEARCHING FOR ALIGNMENT explores a variety

of challenges facing investors and fund managers,

contrasting perspectives on transparency, and the

operational investments and budget priorities among

fund managers.

III: TURNING CLIENT KNOWLEDGE INTO A

COMPETITIVE ADVANTAGE examines obstacles facing

fund managers, changes they are making to better

serve clients and attract capital, key challenges faced

by managers in satisfying investors, and factors keeping

investors from raising allocations to private equity.

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A KIND OF ALCHEMY The private equity market is finally

exhibiting some vital signs, several years after activity came

to a virtual standstill when cheap credit evaporated amid

the global financial crisis. Despite a considerably improved

and optimistic environment, challenges remain. Institutional

investors, consultants, and fund managers all maintain

unique and sometimes divergent perspectives. Investor

expectations and manager priorities are not always aligned.

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Meeting the Needs of Clients and Prospects

A lack of liquidity and underwhelming performance

means most fund managers have had to placate

their often dissatisfied investors in other ways over

the past few years. Almost 70% of investors say they

have enjoyed greater transparency from their private

equity fund managers, while 59% of managers say

they have provided it [Figures 1 and 2].

Just over a fifth of all investors and consultants say

their private equity investments have become more

liquid since 2008. A similar percentage of fund

managers report taking steps to make their vehicles

more liquid in order to retain or attract new capital.

Fees are also lower in some cases. Almost 22% of

investors say they have paid lower management fees

over the past two years, while more than 38% report

paying lower incentive fees. When fund managers

were asked the same question, 37% report lowering

management fees during the same time period,

while 11% say they lowered performance fees.

Scale is being rewarded: 80% of investors with $10

billion or more of assets saw their management fees

lowered since 2008, compared to 33% of investors

with less than $10 billion of assets. Similarly, large

fund managers were the most likely to have lowered

management fees during that time.

What exactly do investors and consultants need?

Are there challenges facing managers that can be

converted into opportunities? What happens next?

In an attempt to familiarize industry participants with

each others’ perspectives and provide actionable

intelligence to those looking to position themselves

more competitively, SEI conducted a survey of

411 private equity fund managers, investors, and

consultants. Results are being released as a three-

part series. As part three of the series, Turning

Client Knowledge into a Competitive Advantage is

focused on:

Obstacles facing fund managers and changes they are making to retain clients and attract capital

Key challenges faced by managers in satisfying existing investors

Factors keeping investors from raising allocations to private equity

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Since the market decline in 2008, has the following increased, decreased or stayed the same?

Percentage of Investors and Consultants

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Level of transparency

Frequency of liquidity

Maximum lock-up period

Withdrawal notice period

Management fee

Incentive fee

Increased Decreased Stayed the Same

Figure 1. Since the market decline in 2008, has the following increased, decreased or stayed the same?

Source: 2011 SEI Private Equity Survey


Percentage of Managers

50 10 15 20 25 30 35 40 45 50 55 60

Increased transparency

Lowered management fee

Increased liquidity

Reduced lock-up periods

Lowered incentive fees

Reduced notice period

Figure 2. Since the market decline in 2008, what changes have you made in order to retain/attract new capital?

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Private equity fund managers cite a variety of

challenges in satisfying their existing clients. Outside

of investment performance, getting investors

comfortable with their infrastructure was named

the single biggest challenge [Figure 3]. Smaller

managers in particular were likely to say this was

an ongoing issue for them. Providing satisfactory

attribution data and effectively educating clients

also pose challenges to many managers. It should

be noted that many managers, including more than

a third of those with $5 billion or more in assets,

chose “other” when asked to name their greatest

challenge in satisfying clients. Examples of these

include convincing investors that a portfolio is

making progress despite relatively few exits, trying

to convince investors that large funds are not

necessarily superior to smaller ones, and persuading

investors that professional management of private

equity investments has value and is worth the cost.

Given these challenges, it is surprising that only half

of all private equity fund managers are investing in

their reporting capabilities and/or their client service

function [Figures 4 and 5]. Smaller fund managers

are especially reticent to make investments in their

reporting capabilities. With more resources available

to them, large managers are not only more likely

to invest in reporting, but are also more likely than

smaller firms to be making investments in client

service. Regulatory requirements are ultimately likely

to prove a strong catalyst for managers of all sizes

to further invest in their client reporting capabilities.

Figure 3. Other than delivering expected performance, what is the greatest challenge in satisfying investors?



0 5 10 15 20 25 30

Getting investors comfortable with infrastructure

Providing satisfactory performance attribution data

Providing broader education/consulting

Providing satisfactory risk analytics

Other

Original text below in cases where wording was shortened for charting purposes:-Getting investors comfortable with firm's operating infrastructure-Providing investors with education/consulting above and beyond my firm's specific activities

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Yes: 50.6%

No: 49.4%


Yes: 48.5%

No: 51.5%

Figure 4. Have you made any material investments (personnel or technology) in client reporting in the past

18 months or do you plan on making any in the next 18 months?



Figure 5. Have you made any material investments (personnel or technology) in client service in the past

18 months or do you plan on making any in the next 18 months?

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Given large overhangs of uninvested capital, raising

money is not an immediate priority for many fund

managers. Nevertheless, the pace of fundraising

is ticking up slightly, with almost two thirds of all

current LPs making new commitments in the first

half of 2011, and 57% intending to make additional

commitments by the end of the year.1 Funds based

in the U.S. raised $64.7 billion during the first half

of 2011, up from $47.8 billion raised during the first

half of 2010. European private equity funds brought

in $24 billion during the first six months of the

year, up from $16.2 billion twelve months earlier.2

Worldwide, almost $128 billion was raised during the

first half of 2011.3

Fund managers planning to raise funds in this

climate will want to listen closely to what investors

have to say. Generalized fear and anxiety are

currently perceived by managers to pose the

biggest obstacles to raising capital, but this is not

borne out by the responses provided by investors

[Figures 6 and 7]. Instead, investors quote an array

of factors that might prevent them from allocating

any additional funds to private equity at the present

time, including liquidity concerns, overall risk,

performance issues, and high fees. All of these

concerns are echoed in responses to a question on

the criteria employed by investors when evaluating

and selecting fund managers [See Part I: The Logic

of Fund Flows].

Corporate investors are most likely to cite liquidity

terms, poor performance, and high fees as barriers

to further private equity investments. Foundations

and endowments are the most likely to be content

with their (already relatively high) allocations, but

they also have some concerns over risk. Funds of

funds (FOFs) cite liquidity terms, poor performance,

and high fees. Public plans most often cite risk

concerns, followed by liquidity terms.

FUND MANAGERS PLANNING TO RAISE

FUNDS IN THIS CLIMATE WILL WANT TO LISTEN

CLOSELY TO WHAT INVESTORS HAVE TO SAY

Roadblocks or Renegotiations?

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50 10 15 20 25 30 35 40 45 50

Investor fear/reluctance

Performance

Liquidity concerns

Risk concerns

Lack of fund infrastructure

High fees/cost

Investment committee discomfort

Extended due diligence

Lack of transparency


50 10 15 20 25 30 35 40 45 50 55

Investors and Consultants Managers

Content with current allocation

Liquidity concerns

Risk concerns

Performance

High fees/cost



Investment committee discomfort

Investor fear/reluctance


Figure 6. Managers, what is the biggest obstacle to raising capital?


Note: Multiple choices allowed Source: 2011 SEI Private Equity Survey

Liquidity terms

Risk concerns

Poor performance

High fees/cost



Discomfort on part of investment committee

Fear/reluctance


Percentage of Investors and Consultants

50 10 15 20 25 30 35 40 45

Figure 7. Investors/Consultants, what are the three biggest obstacles to allocating a greater proportion of assets

to private equity?

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Many fund managers have already taken concrete

steps aimed at attracting larger institutional

mandates. More than 60% have increased

transparency in their reporting, while almost half

have introduced graduated fees based on the

amount of capital committed [Figure 8]. Those

reducing the length of their lock-up periods

comprise a much smaller group, even though it

is something that 28% of investors identify as the

factor most likely to appeal to them as they consider

increasing the size of their allocation.

Public pension plans, FOFs, and corporate investors

are the most likely to identify graduated fees as

the most attractive trade-off for a larger allocation.

Foundations and endowments favor transparency.

Family offices are split between graduated fees and

shorter lock-up periods.

MANY FUND MANAGERS HAVE ALREADY TAKEN

CONCRETE STEPS AIMED AT ATTRACTING LARGER

INSTITUTIONAL MANDATES

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Percentage of Participants

50 10 15 20 25 30 35 40 45 50 55 60 65

Investors Managers

Increased reporting transparency

Graduated fees based on the size of the mandate

Reduced lock-up periods

Figure 8. Managers, which of the following have you offered to attract larger institutional mandates? Investors,

which do you consider most appealing in return for a larger commitment of funds to a private equity manager?

Note: Multiple choices allowed for managers Source: 2011 SEI Private Equity Survey

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What Next?

Having been revived from its crisis-induced coma,

the private equity sector is recovering gradually.

Funds are circulating more freely and the number

of investments and exits is rising in tandem.

Fundraising activity, especially when a large overhang

of uninvested capital remains, is testament to the

growing enthusiasm of fund managers and investors

alike. Faced with less attractive prospects in many

other asset classes, institutional investors are once

again raising their allocations to private equity.

Despite this increasingly favorable environment,

many investors continue to be wary and are

operating with significantly higher expectations after

having suffered a profound shock to the system

during the financial crisis. Nagging concerns over

performance, liquidity, and fees will inevitably fade

as optimism grows, but it would be a mistake for

fund managers to think that they can rest on their

laurels. With deep concerns ranging from portfolio

liquidity to risk transparency, meeting the needs of

institutional investors has become more critical than

ever before.

INSTITUTIONAL INVESTORS ARE ONCE AGAIN RAISING

THEIR ALLOCATIONS TO PRIVATE EQUITY…

BUT MEETING THE NEEDS OF INSTITUTIONAL

INVESTORS HAS BECOME MORE CRITICAL

THAN EVER BEFORE.

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1 The Preqin Quarterly, Q2 2011

2 Dow Jones LP Source

3 Preqin

With so many funds from which to choose, investors can afford to be more discerning than ever. In order to

attract a portion of the increasingly free flowing capital, fund managers will want to:

1. Be aware of evolving selection criteria. As seen

in Part I: The Logic of Fund Flows, this means

offering a clearly articulated investment philosophy

and process while remaining flexible on terms and

conditions. Due diligence is more rigorous than ever,

and managers should be prepared to demonstrate

things like their sector expertise, high-quality client

reporting, deep performance attribution analytics,

and effective risk management infrastructure.

2. Bridge the transparency gap. Industry

participants all agree that there is more transparency

than ever before. Nevertheless as seen in Part

II: Searching for Alignment, a considerable gap

remains between investor expectations and

manager perceptions. There is an opportunity for

managers to establish a competitive advantage by

offering enhanced transparency in areas such as

counterparty risk, leverage and volatility.

3. Turn client service into asset growth. Fund

managers have adapted in a variety of ways over

the past few years. Many of these changes have

come about in response to pressure applied by large

investors. Despite this, many managers continue to

operate without all of the facts. As seen in this paper,

Part III: Turning Client Knowledge into a Competitive

Advantage, half of all managers surveyed point

to investor fear as the biggest obstacle to raising

capital. The truth is that investors and consultants

have a number of very specific concerns, with

fear falling near the bottom of the list. Most of

these concerns can be addressed by any manager

choosing to adopt a proactive approach. Investor

relations can, and should, be used as a source of

actionable intelligence and will likely require greater

investment by fund managers going forward.

It is our hope that this series of papers, in addition to

illuminating some actionable areas of improvement

for private equity managers, will lead to improved

communication between managers, institutional

investors, and consultants as private equity regains

its footing and re-establishes itself as a healthy and

vibrant part of the global economy.

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SEI (NASDAQ:SEIC) is a leading global provider

of investment processing, fund processing, and

investment management business outsourcing

solutions that help corporations, financial

institutions, financial advisors, and ultra-high-

net-worth families create and manage wealth.

As of June 30, 2011, through its subsidiaries

and partnerships in which the company has a

significant interest, SEI manages or administers

$430 billion in mutual fund and pooled assets or

separately managed assets, including $180 billion

in assets under management and $250 billion

in client assets under administration. For more

information, visit www.seic.com.

SEI’s Investment Manager Services division

provides comprehensive operational outsourcing

solutions to support investment managers globally

across a range of registered and unregistered

fund structures, diverse investment strategies and

jurisdictions. With expertise covering traditional

and alternative investment vehicles, the division

applies customized operating services, industry-

leading technologies, and practical business

and regulatory insights to each client’s business

objectives. SEI’s resources enable clients to meet

the demands of the marketplace and sharpen

business strategies by focusing on their core

competencies. The division has been recently

recognized by HFMWeek as “Most Innovative

Fund Administrator (Over $30bn AUA)” and “Best

Funds of Hedge Funds Administrator (Over $30bn

AUA)” in both the US and Europe. Additionally,

SEI has been recognized as “Service Provider of

the Year” by the Money Management Institute,

among other industry awards.

The SEI Knowledge Partnership is an ongoing

source of action-oriented business intelligence

and guidance for SEI’s investment manager

clients. It helps clients understand the issues

that will shape future business conditions, keep

abreast of changing best practices, and develop

more competitive business strategies. The

Partnership is an initiative of SEI’s Investment

Manager Services division.

About SEI

About Greenwich AssociatesGreenwich Associates provides research-based

strategy management services for financial

professionals. Greenwich Associates’ studies

provide benefits to the buyers and sellers of

financial services in the form of benchmark

information on best practices and market

intelligence on overall trends. Based in Stamford,

Connecticut, with additional offices in London,

Toronto, Tokyo, and Singapore, the firm offers over

100 research-based consulting programs to more

than 250 global financial services companies. For

more information on Greenwich Associates, please

visit www.greenwich.com.

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1 Freedom Valley Drive Oaks, PA 19456 610 676 1270

www.seic.com/ims | [email protected]

© 2 0 1 1 S E I 1 1 0 9 5 2 ( 1 0 / 1 1 )

The Investment Manager Services division is an internal business unit of SEI Investments Company. This information is provided for educational purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.

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